Informality and the Cost of Children in Developing Countries

Fernando Gomes Mattar, Breno Sampaio, and Gabriel Ulyssea

This project has been retired

Small Research Grant

Labour market informality is widespread across developing countries. It is typically associated with lower wages, job instability, and lack of social protection. However, informal work arrangements also offer greater flexibility that can be desirable for workers with child-care responsibilities, especially in the presence of rigid labour regulations in the formal sector. This research project analyses the extent to which fertility decisions and the presence of children in the household affect the choices of women to work in the formal or informal sectors, and the ensuing life-cycle costs in terms of participation, accumulation of experience, hours, and earnings.

In the first half of the project, the research team compiles a comprehensive novel dataset on more than 60 million births in Brazil, linked to an identified dataset of parents, which are then merged to two additional administrative data sets: (i) RAIS, a matched employer-employee dataset that contains the universe of formal labour contracts and provides detailed, long-term longitudinal histories of employment in the formal sector of the labour market; and (ii) CadUnico, which is a unified registry of federal social welfare programmes in Brazil. Using these data, the team employs a difference-in-differences design to analyse the impacts on mothers and fathers from the birth of their first child. In the second half of the project, the research team extends the reduced-form setup by performing various heterogeneity analyses, as well as adapting the framework to cross-sectional data. In parallel, they develop and estimate a life-cycle model of fertility and labour supply of women. This model is estimated to evaluate whether policies that seek to increase labour market flexibility are effective in preserving formal jobs following the birth of a child and improving labour outcomes over the lifecycle of women.

This project seeks to address key policy questions, such as to what extent labour market rigidities increase the career cost of children for women relative to men. Moreover, it aims to investigate which policy instruments are more effective in reducing these costs, in particular policies that introduce greater flexibility vis-à-vis policies that equate parental leave or provide greater availability of childcare. While Brazil is not a low-income country itself, there are significant contextual similarities with the informal labour markets in lower-income countries that will make this research useful for policymakers elsewhere in the world. High rates of informality, especially among women with disproportionate childcare responsibilities, and the consequent impact on labour market outcomes has relevance in many sub-Saharan countries.

The empirical results show a substantial child penalty in the formal sector. After birth, mothers’ outcomes (presence in the formal sector, months formally employed and formal wages) decline up to 40% relative to the matched control group of women with no births. These gaps narrow down relatively fast compared to richer countries, such as Denmark, but a gap of around 20% remains even after two or three years. Interestingly, these costs tend to be stronger for women in municipalities with higher informality, but the convergence is faster than in municipalities with low informality. This could suggest that informality can indeed help reducing the overall career costs of children by providing added flexibility in the first years after birth. The counterfactual results from the model suggest that this is indeed the case: when fertility is eliminated in the model, informality falls, and formality increases during the child-bearing years of women’s life cycle.

Research Team

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